Morgan Stanley
  • Wealth Management
  • Jun 18, 2020

Tax-Smart Strategies for Your Retirement

Smart tax planning can help you save more for retirement and keep more of what you’ve already saved. Consider these tax-efficient retirement planning strategies.

Figuring out ways to minimize how much the IRS takes from your retirement money should be a central part of retirement planning. Consider these strategies to help you reduce your taxable income, generate tax-advantaged growth potential in your accounts and keep more of what you’ve worked so hard to save. 

Max Out Your IRA Contributions

The deadline to make a contribution to an Individual Retirement Account (IRA) for 2019 has been extended until July 15, 2020. Note the two primary types of IRAs:

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  1. Traditional IRAs, contributions to which may be tax deductible; or

  2. Roth IRAs, for potential tax-free income if certain conditions are met.1 Roth IRAs are funded with after-tax contributions.

The maximum contribution to an IRA is the lesser of (a) your taxable compensation for 2019, or (b) $6,000 (or $7,000 if you are age 50 or older) for 2019. These limits apply to all your IRAs combined.If you are self-employed or a small business owner, consider establishing a Simplified Employee Pension Plan (SEP) (which is an IRA-based retirement plan) and funding a SEP IRA with employer contributions made under that plan. Note that if your business employs any employees, the SEP will likely have to cover the employees as well if they qualify. For 2019, the maximum contribution to a SEP IRA is $56,000, and the deadline to contribute is the due date of the federal income tax return for your business, which has generally been extended until July 15, 2020 for self-employed individuals.3

Consider a Roth IRA Conversion

High-earning individuals can't invest directly into Roth IRAs, but can transfer assets from a traditional to a Roth IRA. The taxable amount converted is subject to ordinary income tax but provides future income tax-free growth potential. This strategy can work for taxpayers who will not need required minimum distributions from their retirement account during retirement and plan to leave their retirement accounts to their children. Keep in mind, however, that such a conversion in 2020 will increase your adjusted gross income for 2020. Also, due to changes in tax law, a Roth IRA conversion made on or after January 1, 2018 cannot be re-characterized, i.e. “undone."

Required Minimum Distribution (RMD) Update

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which was signed into law December 20, 2019, increased the RMD beginning age to 72 for individuals born after June 30, 1949; the RMD beginning age remains age 70 ½ for individuals born before July 1, 1949. This means that if you were born after June 30, 1949, you won’t need to begin RMDs until at least age 72. In response to COVID-19, the Coronavirus Aid, Relief, and Economic Security (CARES) Act waives RMDs for IRAs and defined contribution plans (including 401(k), 403(b), and governmental 457(b) plans) for calendar year 2020, including RMDs for 2019 that must be taken on or before April 1, 2020, by individuals who turned age 70 ½ in 2019, but only to the extent such RMD was not distributed before January 1, 2020. Speak with your Financial Advisor and your tax advisor about how you should approach taking RMDs in the context of your overall retirement plan. 

Give Your Distribution to Charity

 The CARES Act did not change the rules around Qualified Charitable Distributions (QCDs), which generally allows individuals age 70½ or older to make a QCD of up to $100,000 per year directly from their IRAs to an eligible organization; however, if an individual makes a tax deductible contribution after age 70 ½, the amount the individual can exclude from their taxable income as an IRA qualified charitable distribution will generally be reduced. Keep in mind that, for an IRA distribution to qualify as a QCD, it must satisfy certain requirements (e.g., must be paid directly from your IRA to an eligible organization and not all charitable organizations qualify to receive QCDs). Make sure to work with your Tax Advisor to ensure that you satisfy all the QCD requirements and that QCDs have been correctly reported on your tax return. 

Consider a Smart Gift with Your Distribution

Even though RMDs have been waived for 2020, you can still choose to take a distribution to fund a 529 education savings plan for grandchildren or other family members. While your distribution will be subject to tax, once you invest the funds in a 529 plan they can potentially grow tax-free. Also, any withdrawal used for qualified higher education expenses will generally be tax-free, as well.

Save More in a Variable Annuity

If you’ve maxed out how much you can contribute to 401(k)s, IRAs and other tax-qualified retirement accounts, or your alimony is no longer considered income, consider putting additional savings into variable annuities. Assets in a variable annuity maintain tax-deferred growth potential until they are withdrawn by the contract owner. When you retire, you can elect to receive regular income payments for a specified period or spread over your lifetime. Many annuities also offer a variety of living and death benefit options, usually for additional fees.

Speak with your Morgan Stanley Financial Advisor or Private Wealth Advisor and your personal tax and legal advisors to determine which strategies might be appropriate for you.